SCM Notes 1 and 2 Modules

Supply Chain Management Prepared by Sathish S Nadig
Module 1: Introduction to Supply Chain Management,

Fundamentals of Supply Chain Management
Evolution of Supply chain management, Impact of Supply chain management on company
financials
Importance of Decision phases, Various stages of Decision phases
Supplier Manufacturer Customer Chain and various structures of Supplier Manufacturer Customer
Chain.
Enablers/Drivers of Supply Chain
Supply Chain strategies
Supply chain Performance Measures
Module 2: Strategic Outsourcing- Introduction to outsourcing, Make Vs Buy
Make Vs Buy
Identifying core processes, market Vs hierarchy
Market Vs Buy continuum, sourcing strategy
Supplier selection
Contract negotiation
Creating a world class supplier base
Supplier development, worldwide sourcing
Case study discussion
Module 1
Introduction to Supply Chain Management
Supply Chain Management can be defined as the management of flow of products and services,
which begins from the origin of products and ends at the product’s consumption. It also
comprises movement and storage of raw materials that are involved in work in progress,
inventory and fully furnished goods.
The main objective of supply chain management is to monitor and relate production,
distribution, and shipment of products and services. This can be done by companies with a very
good and tight hold over internal inventories, production, distribution, internal productions and
sales.
In the above figure, we can see the flow of goods, services and information from the producer
to the consumer. The picture depicts the movement of a product from the producer to the
manufacturer, who forwards it to the distributor for shipment. The distributor in turn ships it to
CANARA ENGINEERING COLLEGE, BANTWAL 1

the wholesaler or retailer, who further distributes the products to various shops from where the
customers can easily get the product.
Supply chain management basically merges the supply and demand management. It uses
different strategies and approaches to view the entire chain and work efficiently at each and
every step involved in the chain. Every unit that participates in the process must aim to
minimize the costs and help the companies to improve their long-term performance, while also
creating value for its stakeholders and customers. This process can also minimize the rates by
eradicating the unnecessary expenses, movements and handling.
Here we need to note that supply chain management and supply chain event management are
two different topics to consider. The Supply Chain Event Management considers the factors
that may interrupt the flow of an effective supply chain; possible scenarios are considered and
accordingly, solutions are devised for them.
Supply Chain Management - Advantages
In this era of globalization where companies compete to provide the best quality products to
the customers and satisfy all their demands, supply chain management plays a very important
role. All the companies are highly dependent on effective supply chain process.
Let’s take a look at the major advantages of supply chain.
The key benefits of supply chain management are as follows.
• Develops better customer relationship and service.
• Creates better delivery mechanisms for products and services in demand with minimum
delay.
• Improvises productivity and business functions.
• Minimizes warehouse and transportation costs.
• Minimizes direct and indirect costs.
• Assists in achieving shipping of right products to the right place at the right time.
• Enhances inventory management, supporting the successful execution of just-in-time
stock models.
• Assists companies in adapting to the challenges of globalization, economic upheaval,
expanding consumer expectations, and related differences.
• Assists companies in minimizing waste, driving out costs, and achieving efficiencies
throughout the supply chain process.
These were some of the major advantages of supply chain management. After taking a quick
glance at the concept and advantages on supply chain management, let us take a look at the
main goals of this management.
Supply Chain Management - Goals
• Every firm strives to match supply with demand in a timely fashion with the most
efficient use of resources. Here are some of the important goals of supply chain
management −
• Supply chain partners work collaboratively at different levels to maximize resource
productivity, construct standardized processes, remove duplicate efforts and minimize
inventory levels.
• Minimization of supply chain expenses is very essential, especially when there are
economic uncertainties in companies regarding their wish to conserve capital.

• Cost efficient and cheap products are necessary, but supply chain managers need to
concentrate on value creation for their customers.
• Exceeding the customers’ expectations on a regular basis is the best way to satisfy them.
• Increased expectations of clients for higher product variety, customized goods, off-
season availability of inventory and rapid fulfilment at a cost comparable to in-store
offerings should be matched.
• To meet consumer expectations, merchants need to leverage inventory as a shared
resource and utilize the distributed order management technology to complete orders
from the optimal node in the supply chain.
• Lastly, supply chain management aims at contributing to the financial success of an
enterprise. In addition to all the points highlighted above, it aims at leading enterprises
using the supply chain to improve differentiation, increase sales, and penetrate new
markets. The objective is to drive competitive benefit and shareholder value.
Evolution of Supply Chain Management

The evolution of supply chain management has been a gradual process. Over the last century,
there have been three major revolutions in the field of supply chain management and we
examine each of them in the context of the broader evolution in the economic and technological
environment. Consider the following statement made by the chief executive of an automobile
firm.” Our aim is always to arrange the material and machinery and to simplify the operations
so that practically no orders are necessary. Our finished inventory is in transit. So is most of
our raw material inventory. Our production cycle is about eighty-one hours from the mine to
the finished machine (automobile) in the freight car”.1 It is clear from this statement that this
firm had a well-integrated supply chain in place that allowed it to minimize cost and maximize
asset productivity. Most people, including students and business executives, are surprised to
learn that the company that achieved this, did so
almost a century ago. Indeed, this statement came not in the 1960s or 1970s. Rather, Henry
Ford achieved this fine balance in the 1910s with the Ford Motor Company. Clearly, this
achievement set the standard for all managers the world over. If such a well-integrated and
efficient supply chain was achieved a century ago, then the obvious question is why are
managers still worrying about it. Before we look for the answer to this question let us take a
look at the evolution of supply chain management over the past century and try to understand
of the key dimensions over which supply chains have evolved over the past century. There
have been three major revolutions along this journey.
The First Revolution (1910–1920): Vertical Integrated Firms Offering Low Variety of
Products The first major revolution was staged by the Ford Motor Company where they had
managed to build a tightly integrated chain. The Ford Motor Company owned every part of the
chain— right from the timber to the rails. Through its tightly integrated chain, it could manage
the journey from the iron ore mine to the finished automobile in 81 hours. Ford innovated and
managed to build a highly efficient, but inflexible supply chain that could not handle a wide
product variety and was not sustainable in the long run. General Motors, on the other hand,
understood the demands of the market place and offered a wider variety in terms of automobile
models and colors. Ford’s supply chain required a long time for set-up changes and,

consequently, it had to work with a very high inventory in the chain. Till the second supply
chain revolution, all the automobile firms in Detroit were integrated firms. Even traditional
firms in India, like Hindustan Motors, were highly integrated firms where the bulk of the
manufacturing was done in-house.
The Second Revolution (1960–1970): Tightly Integrated Supply Chains Offering Wide
Variety of Products Towards the end of the first revolution, the manufacturing industry saw
many changes, including a trend towards a wide product variety. To deal with these changes,
firms had to restructure their supply chains to be flexible and efficient. The supply chains were
required to deal with a wider product variety without holding too much inventory. The Toyota
Motor Company successfully addressed all these concerns, thereby ushering in the second
revolution. The Toyota Motor Company came up with ideas that allowed the final assembly
and manufacturing of key components to be done in-house. The bulk of the components was
sourced from a large number of suppliers who were part of the keiretsu system. Keiretsu refers
to a set of companies with interlocking business relationships and shareholdings. The Toyota
Motor Company had long-term relationships with all the suppliers. These suppliers were
located very close to the Toyota assembly plants. Consequently, set-up times, which
traditionally used to take a couple of hours, were reduced to a couple of minutes. This
combination of low set-up times and long-term relationships with suppliers was the key feature
that propelled the second revolution—and it was a long journey from the rigidly integrated
Ford supply chain. The principles followed by Toyota are more popularly known as lean
production systems. The Toyota system, involving tight linkages, did get into some problems
in the later part of the century. Gradually, when Toyota and other Japanese firms tried to set up
assembly plants in different parts of the world, they realized that they would have to take their
suppliers also along with them. Further, they found that some of the suppliers in keiretsu had
become complacent and were no longer cost competitive. With the advent of electronic data
interchange (EDI), which facilitated electronic exchange of information between firms, it was
possible for a firm to integrate with the suppliers without forcing them to locate their plants
close to the manufacturers’ plant. In actual practice, the Toyota supply chain also had certain
rigidities, such as a permanent relation with suppliers, which could become a liability over a
period of time. This, in turn, led to the third revolution spearheaded by couple of progressive
companies like Dell Computers, Apple Inc., and Bharti Airtel, which offered, its customers the
luxury of customization with loosely held supplier networks.
The Third Revolution (1995–2020): Virtually Integrated Global Supply Networks Offering
Customized Products and Services Technology, especially information technology, which is
evolving faster than enterprises can find applications for some of the innovations, is the fuel
for the third revolution in supply chain. It will probably take at least couple of years before we
can fully understand the IT-enabled model that has emerged and begin to apply it to all
industries. However, we have enough information to get a reasonably good understanding of
the contours of the third revolution. We will illustrate key characteristics of the third revolution
using the example of Dell computers, Apple Inc., and Bharti Airtel. The first is a product
company, the second combines product and service, and third is a pure service organization. In
each of these organizations, we will see different aspects of the third revolution

Dell computers allows customers to configure their own laptops (in terms of processors, video
cards, screen sizes, memory, etc.) and track the same in their production and distribution
systems. Apple offers personal digital devices to its customers and iPod is a classic example.
However, it is not just about the product. Apple allows the consumer to have a personalized
user experience through the features and services. Users can personalize the music and other
media content on their device through the various features available on iPod. Similarly, Bharti
Airtel allows services like My Airtel through which customer can have unique personalized
experience. As one can see we have moved to the stage where firms offer a bundle of goods
that leads to personalized experiences, which would be of great value to individual customer.
Value is unique to each customer, and therefore, each customer would wish a customized
experience to be fully satisfied with the value delivered to him or her. In summary, we have
moved from single product (Model T black colour) to wide variety as offered by Toyota to
customization as offered by companies such as Dell computers, Apple, and Bharti Airtel.
Businesses can no longer be content in providing select product variety to customers.
Organizations have moved from offering products to offering user experiences, which are a
bundle of goods and services selected by the user. This has changed the way supply chains are
configured to deliver value. Let us begin with Dell. To make sure its customers get the
completely customized product, Dell has built a strong network of vendors who are cost and
technology leaders. These medium-term relationships are based on the understanding that the
vendors will adhere to a high benchmark on cost and technology leadership which in turn will
reflect in Dell’s products. Apple Inc. brings together a product and a user experience in a
revolutionary new way. Similar to Dell, Apple has global partners with which it maintains
medium term relationships based on cost and technology benchmarking to fulfil its product
manufacturing requirements. However, for creating a better user experience, it has gone a step
further by creating a platform that enables anyone to contribute to the Apple user experience.
Take the example of Apple iTunes and App Store. At the first level, iTunes made it possible
for Apple to provide all the music in the world to its users through a seamless and tightly
integrated platform. While this was only about entertainment, the App Store took it to the next
level. It created a global community of small and medium sized application development teams
who could become partners with Apple, use its App Store platform, and offer a rich bouquet
of utilities and applications which would all help create a one-of-its-kind user experience. So
now, in addition to its strategic global manufacturing partners, using this platform, Apple also
built a global network of partners in a few core areas like app development who had very low
engagement with the company itself. Practically, anyone could become a partner to Apple on
this platform. A key thing to note here is that the primary driver that enabled Apple to build
this platform was information technology and the use of Internet. In Bharti Airtel, we have a
company that has broken several stereotypes. For a telecom company, the core activities like
network management and IT being handled in-house was considered a given. However, Bharti
Airtel chose to go with strategic outsourcing and partnerships with global partners for these
core activities. supply base—are able to create the virtual integration necessary to provide the
user experience. Our discussion of the three major revolutions in supply chain has given us an
understanding of how the dynamic markets and rapidly evolving technologies force us to
continuously improve our understanding of supply chain concepts. To be able to apply the key

concepts of supply chain management, we must be able to observe how they are used in the
context of the business and market scenario. With this backdrop in mind, let us look at some
of the key supply chain concepts and understand why it has become such a critical success
factor in most industries and how firms find better and more efficient ways of managing this
crucial aspect of business in today’s world.
Decision Phases
Decision phases can be defined as the different stages involved in supply chain management
for taking an action or decision related to some product or services. Successful supply chain
management requires decisions on the flow of information, product, and funds that fall into
three decision phases.
Here we will be discussing the three main decision phases involved in the entire process of
supply chain. The three phases are described below −
1.Supply Chain Strategy
In this phase, decision is taken by the management mostly. The decision to be made considers
the sections like long term prediction and involves price of goods that are very expensive if it
goes wrong. It is very important to study the market conditions at this stage.
These decisions consider the prevailing and future conditions of the market. They comprise the
structural layout of supply chain. After the layout is prepared, the tasks and duties of each is
laid out.
All the strategic decisions are taken by the higher authority or the senior management. These
decisions include deciding manufacturing the material, factory location, which should be easy
for transporters to load material and to dispatch at their mentioned location, location of
warehouses for storage of completed product or goods and many more.
2.Supply Chain Planning

Supply chain planning should be done according to the demand and supply view. In order to
understand customers’ demands, a market research should be done. The second thing to
consider is awareness and updated information about the competitors and strategies used by
them to satisfy their customer demands and requirements. As we know, different markets have
different demands and should be dealt with a different approach.
This phase includes it all, starting from predicting the market demand to which market will be
provided the finished goods to which plant is planned in this stage. All the participants or
employees involved with the company should make efforts to make the entire process as
flexible as they can. A supply chain design phase is considered successful if it performs well
in short-term planning.
3.Supply Chain Operations

The third and last decision phase consists of the various functional decisions that are to be made
instantly within minutes, hours or days. The objective behind this decisional phase is
minimizing uncertainty and performance optimization. Starting from handling the customer
order to supplying the customer with that product, everything is included in this phase.
For example, imagine a customer demanding an item manufactured by your company. Initially,
the marketing department is responsible for taking the order and forwarding it to production
department and inventory department. The production department then responds to the
customer demand by sending the demanded item to the warehouse through a proper medium
and the distributor sends it to the customer within a time frame. All the departments engaged
in this process need to work with an aim of improving the performance and minimizing
uncertainty.
Structure of Supplier Manufacturer Customer Chain.

Supply chain participants perform one or more of the four basic functions that make a supply
chain work and give it a reason to exist. Some participants are producers; some
are distributors or wholesalers; and others are retailers. And some participants
are consumers or customers – without customers there is no reason for a supply chain to exist.
In its simplest form, a supply chain is composed of a company and the suppliers and customers
of that company. Combinations of these three types of organizations – supplier, company,
customer – create a simple supply chain. Extended supply chains contain an additional type of
organization called a service provider (as illustrated below).
There is the supplier’s supplier, or ultimate supplier at one end of an extended supply chain.
And the customer’s customer, or ultimate customer at the other end. There are also
organizations that assist other participants in the supply chain. They are service providers in
areas such as: logistics, finance, marketing, forecasting, and information technology. These
different organizations make up the four participants in every supply chain:
1) Producers
Producers or manufacturers are organizations that make a product. This includes companies
that are producers of raw materials and companies that are producers of finished
goods. Producers of raw materials are organizations that mine for minerals, drill for oil and
gas, and cut timber. It also includes organizations that farm the land, raise animals, or catch
seafood. Producers of finished goods use the raw materials and sub-assemblies made by other
producers to create their products. Some producers are consumers or customers of the products
made by other producers. And some producers produce services used by other supply chain
participants.
2) Distributors/Wholesalers

Distributors are companies that take inventory in bulk from producers and deliver a bundle of
related product lines to customers. Distributors are also known as wholesalers. They typically
sell to other businesses and they sell products in larger quantities that an individual consumer
would usually buy. Distributors buffer the producers from fluctuations in product demand by
stocking inventory and doing much of the sales work to find and service customers. For the
customer, distributors fulfil the “Time and Place” function – they deliver products when and
where the customer wants them.
In addition to product promotion and sales, other functions the distributor performs are ones
such as inventory management, warehouse operations and product transportation as well as
customer support and post sales service. A distributor can also be an organization that only
brokers a product between the producer and the customer and never takes ownership of that
product. This kind of distributor performs mainly the functions of product promotion and sales.
In both these cases, as the needs of customers evolve and the range of available products
changes, the distributor is the agent that continually tracks customer needs and matches them
with products available. Distributors provide products to producers and retailers that are their
customers.
3) Retailers
Retailers stock inventory and sell in smaller quantities to the general public. This organization
also closely tracks the preferences and demands of the customers that it sells to. It advertises
to its customers and often uses some combination of price, product selection, service, and
convenience as the primary draw to attract customers for the products it sells. Discount
department stores attract customers using price and wide product selection. Upscale specialty
stores offer a unique line of products and high levels of service. Fast food restaurants use
convenience and low prices as their draw. Retailers are suppliers of products and services to
consumers.
4) Consumers/Customers
Consumers (customers) are any organization that purchase and use a product. A consumer
organization may be an organization that purchases a product in order to incorporate it into
another product that they in turn sell to other consumers (ultimate customers). Consumers
depend on producers, distributors, and retailers to meet their needs.
Service providers support the operation of every supply chain by delivering a mix of services
tailored to meet the particular needs of each supply chain participant. As the mix of supply
chain participants evolves over time, so does the blend of service providers and the services
they offer.

Simulating these Supply Chain Participants

When you define your facilities select “Factory” for the producers in your supply chain; select
“Warehouse” for the distributors; and select “Store” for the retailers. Model your customers by
setting demand levels for products at the different stores. A model using these different
facilities is shown in the screenshot below. By placing the facilities on a map and defining their
operating characteristics plus the product delivery routes connecting them, you create an
accurate model of any supply chain. Then simulations show you how well this supply chain
works.
Supply chain participants perform one or more of the four basic functions that make a supply
chain work and give it a reason to exist. Some participants are producers; some
are distributors or wholesalers; and others are retailers. And some participants
are consumers or customers – without customers there is no reason for a supply chain to exist.
Enablers/Drivers of Supply Chain

Supply chain capabilities are guided by the decisions you make regarding the five supply chain
drivers. Each of these drivers can be developed and managed to
emphasize responsiveness or efficiency depending on changing business requirements. As
you investigate how a supply chain works, you learn about the demands it faces and the
capabilities it needs to be successful. Adjust the supply chain drivers as needed to get those
capabilities.
The five drivers provide a useful framework for thinking about supply chain capabilities.
Decisions made about how each driver operates will determine the blend of responsiveness and
efficiency a supply chain is capable of achieving. The five drivers are illustrated in the diagram
below:
1. PRODUCTION – This driver can be made very responsive by building factories that have
a lot of excess capacity and use flexible manufacturing techniques to produce a wide range of
items. To be even more responsive, a company could do their production in many smaller
plants that are close to major groups of customers so delivery times would be shorter. If
efficiency is desirable, then a company can build factories with very little excess capacity and

have those factories optimized for producing a limited range of items. Further efficiency can
also be gained by centralizing production in large central plants to get better economies of
scale, even though delivery times might be longer.
[Simulate decisions about production in SCM Globe by defining different products and
facilities in the supply chain, and select locations for the facilities that make those products.]
2. INVENTORY – Responsiveness can be had by stocking high levels of inventory for a wide
range of products. Additional responsiveness can be gained by stocking products at many
locations so as to have the inventory close to customers and available to them
immediately. Efficiency in inventory management would call for reducing inventory levels of
all items and especially of items that do not sell as frequently. Also, economies of scale and
cost savings can be gotten by stocking inventory in only a few central locations such as regional
distribution centers (DCs).
[Decisions about inventory are simulated by setting production rates and delivery schedules
for products, and by defining on-hand amounts for different products at facilities throughout
the supply chain.]
3. LOCATION – A location decision that emphasizes responsiveness would be one where a
company establishes many locations that are close to its customer base. For example, fast-food
chains use location to be very responsive to their customers by opening up lots of stores in high
volume markets. Efficiency can be achieved by operating from only a few locations and
centralizing activities in common locations. An example of this is the way e-commerce
retailers serve large geographical markets from only a few central locations that perform a wide
range of activities.
[Simulate this decision by placing your facilities (factories, warehouses, stores) in selected
locations, and then define the storage capacities and operating expenses for those facilities.]
4. TRANSPORTATION – Responsiveness can be achieved by a transportation mode that is
fast and flexible such as trucks and airplanes. Many companies that sell products through
catalogs or on the Internet are able to provide high levels of responsiveness by using
transportation to deliver their products often within 48 hours or less. FedEx and UPS are two
companies that can provide very responsive transportation services. And now Amazon is
expanding and operating its own transportation services in high volume markets to be more
responsive to customer desires. Efficiency can be emphasized by transporting products in
larger batches and doing it less often. The use of transportation modes such as ship, railroad,
and pipelines can be very efficient. Transportation can also be made more efficient if it is
originated out of a central hub facility or distribution center (DC) instead of from many separate
branch locations.
[Simulate transportation decisions in SCM Globe by the modes of transportation (truck,
railroad, ship, airplane) you use to move products between facilities, and by the delivery routes
and frequencies you define.]
5. INFORMATION – The power of this driver grows stronger every year as the technology
for collecting and sharing information becomes wider spread, easier to use, and less
expensive. Information, much like money, is a very useful commodity because it can be
applied directly to enhance the performance of the other four supply chain drivers. High levels
of responsiveness can be achieved when companies collect and share accurate and timely data

generated by the operations of the other four drivers. An example of this is the supply chains
that serve the electronics market; they are some of the most responsive in the
world. Companies in these supply chains, the manufacturers, distributors, and the big retailers
all collect and share data about customer demand, production schedules, and inventory levels.
This enables companies in these supply chains to respond quickly to situations and new market
demands in the high-change and unpredictable world of electronic devices (smartphones,
sensors, home entertainment and video game equipment, etc.).
[SCM Globe simulations generate daily performance data on operating costs and inventory
levels for all the facilities in the supply chain. As you run a simulation you can see what is
happening from end to end across your supply chain. At present most companies don’t have
access to this kind of data about the overall status of the supply chains they participate in —
but that will change as all markets take on the high-change and unpredictable nature seen in
the electronics market.]
The table below summarizes what can be done to guide the five supply chain drivers
toward responsiveness or efficiency. Companies and supply chains continually adjust their
mix of responsiveness and efficiency as situations change.
Over the long run, the cost of one driver — Information — continues to drop while the cost
of the other four drivers continues to rise. Companies that make best use of information to
increase their internal efficiency, and increase their responsiveness to external supply chain
partners will gain the most customers and be the most profitable.
WHEN TO BE EFFICIENT AND WHEN TO BE RESPONSIVE

Efficiency is good — In the 20th century, efficiency drove economic growth. The push for
efficiency increased productivity and lowered the prices of products from automobiles to home
appliances thus making them available to a wide segment of the population. Yet efficiency
requires two things that are becoming much harder to find. The first thing is predictability. To
efficiently plan and manage production and distribution of products you need to know what the
demand will be for those products, and you need to know what the cost of raw materials will

be and what the selling prices will be for the products. Then you can optimize your operations
to produce the right amounts at the right prices and maximize profits.
Efficiency also requires one more thing — stability. You need to know that demand and prices
will remain relatively stable for some number of years (5 or 10 years or more). Because then
you can build factories and stores and transportation infrastructure to enable your efficient
operating model. Efficiency is best when producing relatively simple products and
services that sell in more predictable and stable markets.
Responsiveness is better — In the 21st century, responsiveness drives the economy.
Responsiveness is what drives continuous innovation in products and technology and
continuous change in the ways we organize businesses and serve customers. The big companies
of the 20th century were efficient manufacturing companies (Ford, GM, US Steel, Kodak,
Whirlpool etc.), but the big companies of the 21st century are responsive service and
technology companies (Alibaba, Amazon, Apple, Facebook, Google, Starbucks, Tencent, etc.).
All these 21st century companies certainly need to be efficient, but their success is based mostly
on their ability to sense and respond quickly to changing markets and evolving customer
desires. Lowest price is not always the deciding factor in purchasing decisions. People want
products and services that respond quickly and meet their changing needs and desires.
What is supply chain strategy?

Supply Chain Strategy or Strategic Supply Chain Management is defined as: “A strategy for
how the supply chain will function in its environment to meet the goals of the organization’s
business and organization strategies”.
There’s a kind of magic in some words, “strategy” and “strategic” being key examples. Place
“strategic” in front of the name of any business process and suddenly that process acquires an
aura of great importance. Strategic objectives cry out to be achieved in a way that simple
objectives do not. Strategic planning sounds considerably more sophisticated and powerful
than plain old planning. There’s a reason those words have such power. Strategy, originally a
military term, is how generals marshal all available resources in pursuit of victory. Strategy
wins football games and chess matches—or loses them.
It’s really the same in the business world. Each company has a business strategy that paints a
broad picture of how they will compete in the marketplace. Since business strategy is like
military strategy in that it requires the marshalling and organizing of all its resources, then it
becomes clear that the business’s supply chain can be its most potent strategic resource.
Designing and building the right supply chain, one that promotes the business strategies, may
just be the most powerful way to gain an edge on the competition, to move faster, deliver more
value, and be more flexible in the face of both steady change and surprises. The supply chain
strategy is a complex and evolving means that organizations use to distinguish themselves in
the competitive contest to create value for their customers and investors.
As illustrated in figure mentioned below, you can see how the direction of a firm or
organization is predicated on its business strategy.

If these strategies are not aligned, the direction and fit will be askew. All three strategies are
linked and dependent.
1.Organizational strategy:
The strategy of an enterprise identifies how a company will function in its environment. This
supply chain strategy specifies how to satisfy customers, how to grow the business, how to
compete in its environment, how to manage the organization and develop capabilities within
the business, and how to achieve financial objectives.
Prior to discussing organizational and supply chain strategy in more detail, the first topic in the
section addresses business strategy and competitive advantages. Competitive advantages are
closely related to business strategy because they outline the advantages the organization should
realize once it has decided how it will compete. Other concepts covered in this section includes:
Organizational and supply chain strategy.
Prioritization options.
Organizational capabilities.
Alignment of capabilities and strategy.
Resolving misalignment or gaps.
2.Business strategy:
Typically, a business strategy among supply chain strategies will outline how to grow the
business, how to distinguish the business from the competition and outperform them, how to
achieve superior levels of financial and market performance, and how to create or maintain a
sustainable competitive edge. As per the definition provided previously, business strategies
include least cost, differentiation, and focus. Least cost relates to a lower cost than the
competition for an otherwise equivalent product or service. Differentiation relates to a product
or service with more features, options, or models than the competition. Focus relates to whether
the product or service is designed for a broad audience or a well-defined market segment or
segments. There are many ways that these generic strategies can be combined or made into
hybrids. For example, common business strategies that are generic to many industries and
manufacturers include the following variations:
Best cost—creates a hybrid, low-cost approach for providing a differentiated product or
service.

Low cost—focuses on delivering low price and no-frills basics with prices that are hard to
match.
Broad differentiation—creates product and service attributes that appeal to many buyers
looking for variety of goods.
Focused differentiation—develops unique strategies for target market niches to meet unique
buyer needs.
Focused low cost – designed to meet well-defined buyer needs at a low cost.
Competitive advantages:
Competitive advantages mirror the strategies used to create them: A competitive advantage
exists when an organization is able to provide the same benefits from a product or service at a
lower cost than a competitor (low-cost advantage), deliver benefits that exceed those of a
competitor’s product or service (differentiation advantage), or create a product or service that
is better suited to a given customer segment than what the competition can offer (focus
advantage). The result of this competitive advantage is superior value creation for the
organization and its customers. If this advantage is successfully implemented and marketed, it
should result in improved profits and market share.
FOCUS ADVANTAGE STRATEGIES:
The following discussion is divided into two ways to create a focus advantage:
Niche marketing (versus mass marketing).
Responsiveness.
Niche marketing (vs mass marketing)
Firms can choose to develop products and services for a mass market or for a relatively small
slice of a larger market – a market niche. Some examples of niche market approaches include
Catering to high-net-worth customers with products such as luxury automobiles, yachts, large
homes, or specialized services such as estate planning, personal training, or expensive cruises.
Designing for a limited age group, such as children or senior citizens with special needs instead
of serving a broader population.
Providing products or services for residents of a particular geographic area, such as growing
vegetables for a neighbourhood market rather than for packaging and shipping around the
nation or world.
Niche marketing shares some characteristics with product service differentiation. In both cases,
the product or service provided to customers has special features. Differentiation by quality,
for example, can be the same thing as catering to high-net-worth customers. (Low-net-worth
customers, or value shoppers, can also be niche.) Therefore, some supply chain strategies will
work for both approaches. Collaboration to achieve distinctive design is one example.
Depending upon the niche, sourcing may focus more on finding special expertise or high-
quality materials rather than on low-cost labour.
Choosing business strategies:
While some firms may focus primarily on one business strategy, others may pursue a mix of
strategies. Note, however, that making one strategy the priority may make other strategies
difficult to achieve. For example, providing high quality at the lowest price is a challenge. But
not all the strategies are mutually exclusive. Product differentiation and niche marketing fit

well together. Either responsiveness or low cost may be a key competitive factor that
differentiates a firm from its market rivals.
Once an organization has decided on a business strategy, it uses these choices to drive the
organizational strategy and eventually the supply chain strategy
Supply chain Performance Measure

Supply chain performance measure can be defined as an approach to judge the performance of
supply chain system. Supply chain performance measures can broadly be classified into two
categories −
Qualitative measures − For example, customer satisfaction and product quality.
Quantitative measures − For example, order-to-delivery lead time, supply chain response
time, flexibility, resource utilization, delivery performance.
Here, we will be considering the quantitative performance measures only. The performance of
a supply chain can be improvised by using a multi-dimensional strategy, which addresses how
the company needs to provide services to diverse customer demands.
Quantitative Measures
Mostly the measures taken for measuring the performance may be somewhat similar to each
other, but the objective behind each segment is very different from the other.
Quantitative measures is the assessments used to measure the performance, and compare or
track the performance or products. We can further divide the quantitative measures of supply
chain performance into two types. They are −
Non-financial measures
Financial measures
1.Non - Financials Measures

The metrics of non-financial measures comprise cycle time, customer service level, inventory
levels, resource utilization ability to perform, flexibility, and quality. In this section, we will
discuss the first four dimensions of the metrics −
Cycle Time
Cycle time is often called the lead time. It can be simply defined as the end-to-end delay in a
business process. For supply chains, cycle time can be defined as the business processes of
interest, supply chain process and the order-to-delivery process. In the cycle time, we should
learn about two types of lead times. They are as follows −
Supply chain lead time
Order-to-delivery lead time
The order-to-delivery lead time can be defined as the time of delay in the middle of the
placement of order by a customer and the delivery of products to the customer. In case the item
is in stock, it would be similar to the distribution lead time and order management time. If the
ordered item needs to be produced, it would be the summation of supplier lead time,
manufacturing lead time, distribution lead time and order management time.
The supply chain process lead time can be defined as the time taken by the supply chain to
transform the raw materials into final products along with the time required to reach the
products to the customer’s destination address.

Hence it comprises supplier lead time, manufacturing lead time, distribution lead time and the
logistics lead time for transport of raw materials from suppliers to plants and for shipment of
semi-finished/finished products in and out of intermediate storage points.
Lead time in supply chains is governed by the halts in the interface because of the interfaces
between suppliers and manufacturing plants, between plants and warehouses, between
distributors and retailers and many more.
Lead time compression is a crucial topic to discuss due to the time based competition and the
collaboration of lead time with inventory levels, costs, and customer service levels.
Customer Service Level
The customer service level in a supply chain is marked as an operation of multiple unique
performance indices. Here we have three measures to gauge performance. They are as follows.
Order fill rate − The order fill rate is the portion of customer demands that can be easily
satisfied from the stock available. For this portion of customer demands, there is no need to
consider the supplier lead time and the manufacturing lead time. The order fill rate could be
with respect to a central warehouse or a field warehouse or stock at any level in the system.
Stockout rate − It is the reverse of order fill rate and marks the portion of orders lost because
of a stockout.
Backorder level − This is yet another measure, which is the gauge of total number of orders
waiting to be filled.
Probability of on-time delivery − It is the portion of customer orders that are completed on-
time, i.e., within the agreed-upon due date.
In order to maximize the customer service level, it is important to maximize order fill rate,
minimize stockout rate, and minimize backorder levels.
Inventory Levels
As the inventory-carrying costs increase the total costs significantly, it is essential to carry
sufficient inventory to meet the customer demands. In a supply chain system, inventories can
be further divided into four categories.
• Raw materials
• Work-in-process, i.e., unfinished and semi-finished sections
• Finished goods inventory
• Spare parts
• Every inventory is held for a different reason. It’s a must to maintain optimal levels of
each type of inventory. Hence gauging the actual inventory levels will supply a better
scenario of system efficiency.
Resource Utilization
In a supply chain network, huge variety of resources is used. These different types of resources
available for different applications are mentioned below.
• Manufacturing resources − Include the machines, material handlers, tools, etc.
• Storage resources − Comprise warehouses, automated storage and retrieval systems.
• Logistics resources − Engage trucks, rail transport, air-cargo carriers, etc.
• Human resources − Consist of labour, scientific and technical personnel.
• Financial resources − Include working capital, stocks, etc.

In the resource utilization paradigm, the main motto is to utilize all the assets or resources
efficiently in order to maximize customer service levels, reduce lead times and optimize
inventory levels.
2.Finanacial Measures
The measures taken for gauging different fixed and operational costs related to a supply chain
are considered the financial measures. Finally, the key objective to be achieved is to maximize
the revenue by maintaining low supply chain costs.
There is a hike in prices because of the inventories, transportation, facilities, operations,
technology, materials, and labor. Generally, the financial performance of a supply chain is
assessed by considering the following items −
• Cost of raw materials.
• Revenue from goods sold.
• Activity-based costs like the material handling, manufacturing, assembling rates etc.
• Inventory holding costs.
• Transportation costs.
• Cost of expired perishable goods.
• Penalties for incorrectly filled or late orders delivered to customers.
• Credits for incorrectly filled or late deliveries from suppliers.
• Cost of goods returned by customers.
• Credits for goods returned to suppliers.
In short, we can say that the financial performance indices can be merged as one by using key
modules such as activity-based costing, inventory costing, transportation costing, and inter-
company financial transactions.

Module-2
Introduction to Outsourcing
The decision of a firm to perform its activities internally or get those activities done from an
independent firm is known as the make versus buy decision. This make versus buy issue is
strategic in nature and involves the following key decisions: What activities should be carried
out by the firm and what activities should be outsourced? How to select the entities/partners to
carry out outsourced activities and what should be the nature of the relationship with those
entities? Should the relationship be transactional in nature or should it be a long-term
partnership? When Bharti Airtel, India’s number one private telecom service provider,
announced its decision to outsource key network management activities, it sent shockwaves in
the Indian industry. In addition to outsourcing network management services, it decided to
outsource IT services and call centre operations also. This bold decision by Bharti generated a
huge debate, not only among the telecom players but also among the Indian industries in
general. One view is that by outsourcing these key activities, Bharti might lose its edge in the
long run to end up as a hollow company, while the other view is that by outsourcing these
activities to more competent external firms, Bharti can focus its energies on designing
innovative offerings, customer relationships and brand building
Make Versus Buy: The Strategic Approach

The supply chain involves a number of firms and encompasses all activities associated with the
transformation of goods from the raw material stage to the final stage, wherein the goods and
services reach the end customer. While studying make versus buy decisions, we analyse from
the point of view of the focal firm or the nodal firm, which is at the strategic centre of the
supply chain. The firm that provides an identity to the product in terms of brand (Bharti, HUL,
Nike, etc.) has higher stakes in the chain and has been identified as the main entity of the chain,
as discussed in Chapter 1. The make versus buy decision evaluates the contribution of each
activity. Using the value chain framework developed by Michael Porter, we classify all supply
chain activities as primary activities and support activities. Primary activities consist of
inbound logistics, operations, outbound logistics, sales and service. Secondary activities
involve procurement, technology development, human resource management and firm
infrastructure management. The make versus buy decisions look at each of these activities
critically and ask the question: Should this activity be done internally or can it be outsourced
to an external party? Once the decision to outsource has been taken, the firm has to choose
among competing suppliers and also decide on the nature of the relationship it would like to
establish with the supplier firm. Traditionally, firms believed that everything should be done
internally unless there is a compelling logic in favour of outsourcing. Thus, all outsourcing-
related decisions had to be justified. We have come a long way from the days of the Ford Motor
Company, where vertical integration was the norm. Now, perhaps, we are on the other extreme
with our discussion of virtual corporations, where a firm starts with the assumption that all
activities must be outsourced unless there is a compelling logic to justify keeping activities in-
house. Michael Dell, the CEO of Dell Computers, has stated that if his company was vertically

integrated, it would need five times as many employees and would suffer from a drag effect.
Apart from primary activities in the value chain, even support activities that were usually done
in-house are outsourced in big way now. Rather than taking extreme positions, we need to build
up managerial logic to understand these issues. Hence, we first look at a few cases where firms
have made these decisions in recent years and then bring out a conceptual framework that can
help firms in their make versus buy decisions.
Identifying Core Processes
As exemplified by Bharti Airtel, the decision to identify selected processes as core processes
and focus on improving those can have a significant impact on the performance of a firm. The
identification of core processes is a crucial decision. If this is driven by short-term benefits
such as re-engineering of balance sheets and improved return on investments, then the long-
term business sustainability is endangered. Instead of becoming the best in the chosen category
(represented by core processes), the firm runs the risk of ending up as a mere hollow
corporation. The mere decision to focus the resources on core activities to match capabilities
with the best-in-class performance is not enough; firms must strive to be the best in the world
in that specific area.
In these areas they can invest in people, equipment and R&D. Such a focus will also help the
firm in attracting the best talent from that field. Many corporations have realized that they can
never hope to attract the best talent in IT; hence, they have decided to depend on their outside
partners for the IT support required for business application. Thus, the first step for a firm is to
develop the capability to distinguish between core activities and commodity activities. Even
among core activities, it has to keep certain activities in-house, and for all outsourced critical
activities, it has to maintain some knowledge so that it can manage an effective relationship
with its outsourcing partner. The two ways through which one can identify a firm’s core
processes are the business process route and the product architecture route
1.The Business Process Route
For any firm, three core and high-level business processes include customer relationship,
product innovation and supply chain management. Customer relationship focuses on acquiring
new customers and building relationships with existing customers. Product innovation focuses
on developing new products and services, while supply chain management focuses on
fulfilment of customer orders. It is possible to un-bundle the three business processes and a
firm can afford to outsource two of these business processes. Some researchers have argued
that a firm must identify and ensure that it builds core capabilities in-house in at least one of
these areas. Firms like HP and high-end pharmaceutical firms focus on product innovations.
Firms like Nike and Benetton focus on brand building and customer relationships. Firms like
Wal-Mart and Dell Computers focus on supply chain management capabilities. Of course,
within the identified core business process, firms can examine each of the activity and probably
outsource those activities that are of the commodity type. For example, within supply chain
management, firms might outsource the warehousing or transportation functions. In the case of
Microsoft, it decided that customer relationship management and software design are its core
processes, while design and manufacturing is not core to its business. Bharti decided that
customer relationship was core and network management was not. Core processes retained
within the company must be strategic from the business point of view. Firms must realize that

value within the chain gets distributed to the chain partners on the basis of the unique
capabilities that they bring to the table. A firm has to ensure that it has a relatively higher
bargaining power within the chain. A firm has to make sure that in-house business processes
give it enough strategic power in the chain and do not allow other chain partners to dictate the
terms of value exchange in the chain. In the PC business, the power within the chain went to
Intel and Microsoft. So, even though IBM was at a strategic point in product development, it
lost its power and became a peripheral player in the chain.
2.The Product Architecture Route
In the product architecture approach, the focus is on sub-systems and components and the make
or buy decisions are made at that level. A product like a car can be divided into sub-systems
such as engine, chassis and transmission. The engine sub-system can be divided into
components such as power cylinder, fuel system and engine electronics. In a product, first the
sub-systems are classified as strategic and non-strategic. A sub-system is strategic if it involves
technologies that change rapidly, if it requires specialized skills and technologies and if it can
significantly impact the performance of the product on attributes that are considered important
by the customer. By keeping theses strategic sub-systems internal, a firm can ensure that it can
offer differentiated products and can avoid being commoditized. Further, within a sub-system,
the same kind of analysis has to be done for all major components. All those components where
the firm is technologically ahead of potential suppliers or can hope to achieve a leadership
position with some investments are kept internal to the firm. In case the suppliers have a huge
technological lead, which will be impossible to bridge in the foreseeable future, or if the time
and investments required for catching up may not be worth the effort, then the component
should be outsourced and the supplier should be treated as a strategic partner Of course, if a
firm finds that for all the components the suppliers have a lead and it has no hope of catching
up in the near future,
Market Versus Hierarchy

The make versus buy decision is also known as the market versus hierarchy decision in
economics literature. The key issue here is to coordinate the chain so as to provide a bundle of
goods and services at the lowest cost for a given level of service required by the customer. If a
firm decides to make the relevant component in-house, it may not have the necessary
economies of scale and might have to use internal hierarchy for coordination. In the hierarchical
form, a firm has greater control over coordination but there may not be enough motivation for
the internal supplier to work on innovations to reduce cost and improve service over a period
of time. The costs involved in control and coordination of internal supply is termed agency
costs in economics. When a firm uses market mechanisms to procure the necessary inputs, it
may be able to take advantage of economies of scale and also choose the supplier that supplies
goods and services at lower prices. In this case, the supplier has enough motivation to innovate
and the firm, as a buyer, has the flexibility of changing the supplier, which is not an option
available to the firm that chooses to make inputs internally. However, there are costs incurred
in the control and coordination of the external supplier and are termed as transaction costs in
economics. Costs related to economies of scale are tangible in nature but the bulk of agency
and transaction costs are intangible in nature. We first look at each of the three issues,

economies of scale, agency costs and transaction costs, in detail and finally study the overall
framework of the decision-making process. Initially, the focus will be purely on the make
versus buy decision, where we assume that the firm has an arm’s-length relationship with the
firm from where it is buying and that it is managing coordination and relationship with the
supplier firm only through a formal contract. At a later stage, we will look at the entire
continuum, where several intermediate types of relationships are possible between the pure
make versus buy situations.
The Make-Versus-Buy Continuum
We started out by exploring two extreme positions: (a) make an input or buy an input using the
market and (b) vertical integration versus market, where the buyer has an arm’s-length
relationship with the suppliers. There are several alternative ways in which the exchange can
be organized. In this section, we discuss two important alternatives: (a) Tapered integration,
where a firm both makes and buys a given input. (b) Collaborative relationship, which could
be a formal contractual relation or a long-term informal relationship, based on trust. In some
cases, it can lead to alliances or joint ventures.
1.Tapered Integration
Tapered integration represents a mixture of market and vertical integration. A firm makes part
of the requirement in-house and procures the rest from the market. Firms like Pizza Corner and
Madura Garments fall in this category, wherein they own some retail outlets and depend on
franchisee or other models for the rest of their sales. Keeping part of the manufacturing in-
house allows firms to have a better understanding of the industry cost structures, and this helps
them in negotiating better deals with suppliers. Firms are able to keep up the pressure on their
internal supply group to innovate and work on cost reductions by showing them benchmark
numbers from markets. Firms can also keep the pressure on the supplier by saying that if they
do not improve the complete manufacturing will be shifted in-house, as they have the capability
for it. As this helps avoid a potential hold-up situation, the firm is less vulnerable on this front.
Though at first glance it looks like as if tapered integration allows a firm the best of both worlds,
if not managed properly, the firm might end up getting the worst of both worlds. By distributing
production between internal and external supply groups, a firm may not have economies of
scale at both places. Further, the coordination and monitoring activities might increase costs
significantly.
2.Collaborative Relationship
In a collaborative relationship, the supplier is an extension of the firm. The firm treats its
suppliers as strategic partners and usually a supplier is assured of business for a reasonably
long period of time. The firm does not indulge in competitive bidding every year and does not
change its supplier to get the small price reduction offered by a competing supplier. Information
is shared freely across firms, and the supplier is willing to invest in relationship-specific assets.
Usually, the supplier gets involved early at the product design stage and the price paid to the
supplier is based on the actual costs incurred. One major concern in collaborative relationships
is ensuring that the supplier keeps working on innovations. Just like the internal supplier, the
partner in a collaborative relationship is assured of business, and this may result in
complacency on the part of the supplier. Firms should periodically benchmark the partner’s
costs with the market so as to ensure that the supplier remains competitive. Dell Computers

benchmarks all its partners on cost and technology leadership. Only if the supplier maintains
leadership on both these fronts does Dell continue with the same partner. Firms like Toyota
buy 80 per cent of the required components from the market. But Toyota and other Japanese
firms do not keep their suppliers at an arm’s length and do not work with contractual
relationships. Japanese manufacturers work with a network of suppliers with whom they
maintain close long-term relationships. Japanese companies have subcontractor networks
called keiretsu. This network involves vendors, bankers and distributors. Firms within a
keiretsu are linked by informal personal relationships. As they share long-term relationships,
they avoid most of the problems associated with market exchange relationships and are willing
to invest in higher relationship-specific assets and do not worry about information asymmetry
and hold-up problems. This allows each firm within the keiretsu to focus on its core competence
and all get the necessary economies of scale. However, since they are assured of a market they
may also suffer from agency problems discussed in vertical integration. American and
European automakers have realized the importance of collaborative relationships and have
been progressing in that direction over the past two decades without creating keiretsu-like
structures. To get similar benefits out of collaborative partnerships, Western firms have
explored strategic alliances and joint ventures. Sourcing Strategy: Portfolio Approach Firms
buy a large number of components and services and, of course, not all of them should be
handled in same way. The popular portfolio approach developed by Kraljic classifies items
based on the importance of the item in terms of value of purchase (high versus low) and
associated supply risk in the supply market. Supply risk captures two dimensions: number of
suppliers in the market and the demand–supply gap in the supply market. If an item has very
few suppliers who have monopoly in the market and supply is less than the demand, the buyer
faces a significant supply risk. In supply markets where there are large numbers of players and
there is surplus capacity in the market, the items bought will be classified as low-supply-risk
category items. Packaging material and transport service markets come in this category and
represent low-risk items. Diesel engines, diesel fuel systems and proprietary technology items
have few suppliers, so they represent the high-risk-supply category. For example, Bosch has a
market share of 81 per cent in the fuel-injection equipment market, so obviously it comes under
the high-risk category. Similarly, oil and steel in the early part of the 21st century represented
the high-risk category because demand outstripped supply. There was a strong demand for steel
and fuel in India and China and, as a result, demand outstripped supply. Because of the supply
uncertainty created by the disturbances in Iraq, the supply risk for oil increased significantly
after the interventions by the United States of America in Iraq. Classifying items on their
purchasing value is a straightforward issue because it just needs internal data and growth
projections at the firm level. Supply risk, on the other hand, represents a more sophisticated
analysis because the focus is on the supply markets, and in the case of many commodities, the
supply markets are global in nature. So, firms should either develop adequate capability in this
area or should take help from experts for carrying out this exercise.
Sourcing Strategy: Portfolio Approach
Firms buy a large number of components and services and, of course, not all of them should
be handled in same way. The popular portfolio approach developed by Kraljic classifies items
based on the importance of the item in terms of value of purchase (high versus low) and

associated supply risk in the supply market. Supply risk captures two dimensions: number of
suppliers in the market and the demand–supply gap in the supply market. If an item has very
few suppliers who have monopoly in the market and supply is less than the demand, the buyer
faces a significant supply risk. In supply markets where there are large numbers of players and
there is surplus capacity in the market, the items bought will be classified as low-supply-risk
category items. Packaging material and transport service markets come in this category and
represent low-risk items. Diesel engines, diesel fuel systems and proprietary technology items
have few suppliers, so they represent the high-risk-supply category. For example, Bosch has a
market share of 81 per cent in the fuel-injection equipment market, so obviously it comes under
the high-risk category. Similarly, oil and steel in the early part of the 21st century represented
the high-risk category because demand outstripped supply. There was a strong demand for steel
and fuel in India and China and, as a result, demand outstripped supply. Because of the supply
uncertainty created by the disturbances in Iraq, the supply risk for oil increased significantly
after the interventions by the United States of America in Iraq. Classifying items on their
purchasing value is a straightforward issue because it just needs internal data and growth
projections at the firm level. Supply risk, on the other hand, represents a more sophisticated
analysis because the focus is on the supply markets, and in the case of many commodities, the
supply markets are global in nature. So, firms should either develop adequate capability in this
area or should take help from experts for carrying out this exercise.
Like everything else, purchasing expenditure per item also follows the 80–20 rule, that is,
20 per cent of the items represent about 80 per cent of the value of purchase. Similarly, the
bargaining power of buyers and suppliers depends on the demand–supply conditions in the
supply markets and hence are different for different items. Typically, managers end up
spending equal amounts of time and effort on all items and all suppliers. Because each supplier
has to go through supplier certification, if there are large numbers of items and distinct
components the purchasing manager may not be focusing on items where opportunities may
be high or supply risks are significant.
To understand this issue better, see Figure below, which has aggregate data from the portfolio
analysis carried out by a couple of Indian firms. As can be seen in Figure, 4–10 per cent
of parts accounted for about 70–80 per cent of the purchase value. On supply-risk dimensions,
82–90 per cent of the items represent low-supply-risk situations. What is most striking is the

low-value, low-risk quadrant. Items in this quadrant account for 80–85 per cent of the items
and 15–25 per cent of the purchase value. The explicit data on purchase orders are not presented
in the study, but it is very likely that the low-value, low-risk quadrant will account for the
largest number of purchase orders and, therefore, will take up the bulk of the purchasing
manager’s time. We obviously need a different sourcing strategy for each quadrant.
As shown in Figure, the four quadrants are named as follows: routine products, leverage
products, strategic products and bottleneck products. We take each category and discuss
the sourcing strategy.
• Routine products. This quadrant represents significant opportunity. The focus is on reducing
the number of parts and the number of suppliers. The aim is to reduce administrative and
logistics complexity. The time saved here is used to focus on strategic suppliers and bottleneck
suppliers. The focus is on moving to system buying rather than component buying. A large
number of items and suppliers come in this quarter, which represents a non-critical, low-valued
supply. Unfortunately, managers end up spending much energy in this quarter. Ideally, the
purchasing department should not waste its energy on small items. Rather, it should aggregate
components into systems and start sourcing the systems. This issue is discussed in greater detail
in the section titled “Reconfiguration of the Supply Base”.
• Leverage products. This quadrant consists of high-value, standard products. These items
provide an opportunity for leveraging buying power in low-supply-risk situations. In these
supply markets, there are a large number of suppliers and switching costs are low. So, firms
should be aggressive in their attempts to encourage competitive bidding in order to leverage
their position. Most of the benefits obtained by firms in reverse auctions have been in this
category.
• Strategic products. This quadrant represents high-value products with high supply risks. As
shown in Figure, this quadrant usually accounts for less than 5 per cent of the items and for
almost 40 per cent of purchase value. Items in this quadrant are treated as strategic items, and
a firm must work towards establishing collaborative, long-term relationships with suppliers in
this quadrant. Firms must create opportunities for mutual cost reduction by working together
on all aspects, including product design. Because fewer parts and suppliers are involved, firms
can invest in building collaborative relationships. The top management of firms should get
actively involved in devising a strategy for this category of items.
• Bottleneck products. These items represent relatively low value, but a firm is vulnerable on
this front because of the supply risk inherent in this market. Since a firm is likely to be buying
relatively smaller value, it is also unlikely to have much clout with suppliers. Here, the focus
is on securing supply, and a firm should actively keep looking at alternative sources of supply.
If possible, the firm should also look at substitutes that are from low-risk supply markets. For
example, in the diesel fuel system, there may not be too many suppliers of the required
capability and competence. A firm might try and develop a better understanding of supplier
priorities and their planning systems so that it can align its buying plan with the suppliers’
operating plans. For example, some steel producers produce certain grades of steel only once
in a year. If an interested firm knew of their internal processes, it might be in a better position
to obtain reliable supply. If required, the firm should also be willing to pay a premium for a
reliable source of supply.

Reconfiguration of the Supply Base

Most Indian companies work with a large number of vendors. In the past, a number of items
were reserved for the small-scale sector and this forced Indian corporations to source material
from many small players. Most of these small firms had very little motivation to innovate.
Further, purchasing managers preferred to work with a large number of suppliers so that as a
buyer the firm could play one supplier against another at the bidding stage. If we take the
example of freight, typically, Indian firms work with a large number of transporters. Toyota
Kirloskar has just one strategic supplier of logistics services with whom it has a collaborative
relationship. Other firms may not want to go all the way to single sourcing, but they have to
work on reconfiguring their supply base so as to reduce the number of suppliers.
Reconfiguration involves the following two ideas:
• Move to system buying
• Reduce the number of suppliers per item/system.
As discussed earlier, purchase portfolio analysis reveals that 80 per cent of the items constitute
20 per cent of the value. Rather than buying individual components, firms should buy systems
and modules. This is illustrated with an example from the automobile industry. Typically, a
firm like GM used to buy seat parts from 25-odd suppliers, while Japanese firms like Nissan
buy the complete seat from a supplier. This does not mean that the supplier manufactured all
the 25 components of the seat; it just means that the supplier is a first-tier supplier who in turn
buys sub-systems from second-tier companies, who in turn depend on third-tier companies.
The difference between GM’s and Nissan’s approach is illustrated in Figure. It is not difficult
to appreciate the difference between the coordination costs involved in procuring car seats at
GM and at Nissan. Auto assemblers, globally, have minimized their coordination costs by

moving to system/module buying, which requires a pyramid-shaped supply structure. Auto

assemblers work closely with tier I suppliers who are responsible for the design and delivery
of complete modules like seats, doors, and dashboards. These system suppliers buy their own
sub-systems from tier II suppliers, who in turn buy individual items from tier III suppliers. By
working only with tier, I suppliers, a firm can not only reduce coordination costs but also work
on various initiatives to improve material and information flow across the chain.
Supplier Selection—Auctions and Negotiations

Before selecting suppliers, a firm must decide whether to use single sourcing or multiple
suppliers. Single sourcing guarantees the supplier sufficient business when the supplier must
make a significant buyer-specific investment. While, having multiple sources ensures a degree
of competition and also lowers risk by providing a backup should a source fail to deliver.
The selection of suppliers is done using a variety of mechanisms, including offline competitive
bids, reverse auctions, or direct negotiations. No matter what mechanism is used, supplier
selection should be based on the total cost of using a supplier and not just the purchase price.
In general, auctions are best used when the quantifiable acquisition cost is the primary
component of total cost. If ownership or post-ownership costs are significant, direct
negotiations often lead to the best outcome. In many supply chain settings, a buyer looks to
outsource a supply chain function such as production or transportation. Potential suppliers are
first qualified and then allowed to bid on how much they would charge to perform the function.
When conducting an auction based primarily on unit price, it is thus important for the buyer to
specify performance expectations along all dimensions other than price. From the buyer’s
perspective, the purpose of an auction is to get bidders to reveal their underlying cost structure
so the buyer can select the supplier with the lowest costs. A significant factor that must be
accounted for when designing an auction is the possibility of collusion among bidders.
Second-price auctions are particularly vulnerable to collusion (contract is assigned to the
lowest bidder—but at the price quoted by the second-lowest bidder)
Basic principles of negotiation
Firms enter into negotiations both for supplier selection and to set the terms of the contract
with an existing supplier.
Negotiation is likely to result in a positive outcome only if the value the buyer places on
outsourcing the supply chain function to a supplier is at least as large as the value the supplier
places on performing the function for the buyer.
The difference between the values of the buyer and seller is referred to as the bargaining
surplus.
A good estimate of the bargaining surplus improves the chance of a successful outcome.
Suppliers of Toyota have often mentioned that “Toyota knows our costs better than we do,”
which leads to better negotiations.
The key to a successful negotiation, however, is to make it a win–win outcome that grows the
surplus. It is impossible to obtain a win–win outcome if the two parties are negotiating on a
single dimension, such as price.

To create a win–win negotiation, the two parties must identify more than one issue to negotiate.
Identifying multiple issues allows the opportunity to expand the pie if the two parties have
different preferences.
This is often easier than it seems in a supply chain setting, especially if both parties focus on
the total cost of ownership.
Creating a World-class Supply Base

Competitive edge is something all companies strive for as part of building their so-called
“world-class supply chain.” From a high-level definition, this means having effective
interdependent relationships between people, process and technology; and from our suppliers
to our customers such that we are enabled to increase market value and drive down end-to-end
supply chain costs.
Core elements of effort in getting to that end state include:
• Collaborative long-term relationships built on respect and trust
• Effective demand signals that drive sourcing and manufacturing and enable volume
adjustments as needed
• Operations and logistics alignment with capacity managed and levelled production
schedules
• Ability to manage mixed loads with on-time / in-full delivery coming into and going
out of the organization
• Ongoing collaborative operations and product delivery improvement with cost
reductions across the end-to-end chain
Becoming world-class requires that we focus on operational excellence and use all means at
our disposal to ensure:
• Increased visibility across the supply chain
• Improved control and decision-making
• Improved product availability
• Improved alignment between organization and targets
• Increased data accuracy and user confidence
• Increased system performance
• Standardizing and harmonizing people, processes and technology
• Put all this together, and the value opportunities to business become real:
• Reduce inventory between 15% and 30%
• Increase inventory turns by as much as > 17.5%
• Improve supply chain service levels by > 20%
• Increase process efficiency by > 20%
Supplier Development
Supplier development describes a structured program to improve the capability of suppliers.
Buyers may seek to improve capability by sharing ideas with their suppliers, by seconding
staff, by advancing funds for investment, or by working collaboratively to jointly develop new
processes.
Supplier development is resource intensive and usually focuses on key long-term suppliers
with whom cooperation is appropriate.

The logic is that, through developing the supplier’s capability, both parties will share in the
benefits of better performance, better quality, shorter cycle times and/or lower costs.
The Role of Supplier Development in Supply Chain Success

• Earn a Competitive Advantage
• Encourage Collaboration Between Individual Suppliers
• Drive Innovation
• Create Stronger Long-term Supplier Relationships
• Resolve Performance and Quality Issues
• Enhanced Customer Satisfaction
•
Worldwide Sourcing
This is also termed as global sourcing. It is the process of sourcing goods and services from the
international market across geopolitical boundaries.
It aims to exploit global efficiencies such as lower cost skilled labor, cheaper raw materials and
other economic factors like tax breaks and low trade tariffs. Examples are call centers in India,
clothing and shoes manufactured in Ethiopia and Thailand.
Some advantages of global sourcing are learning how to do business successfully in a new
market, finding and developing alternate supplier sources to reduce costs and stimulate
competition.
The opportunity exists to locate scarce skills and resources not available or unproductive at
home thereby increasing manufacturing capacity and other technical capabilities.
There are also disadvantages. Monitoring costs go up and there are hidden costs relating to the
effort and time spent learning about different cultures and time zones, especially in the
beginning. There is exposure to financial, political and legal risks, often in emerging
economies.
Case Studies
B H A R T I A I R T E L: O U T S O U R C I N G O F NETWORK OPERATIONS
Bharti Airtel Limited, formerly known as Bharti Tele-Ventures, is one of India’s leading
private sector providers of telecommunications services with a market capitalization of Rs 936
billion, revenue of Rs 185 billion and customer base of 27 million. Bharti Airtel has been rated
as one of the top 10 best-performing companies in the world in the BusinessWeek IT 100 list.
For the last couple of years, its subscriber base has been growing steadily at 60 per cent per
annum. In 2004, Bharti decided to outsource the following three areas of operations:
• Network management to Ericsson, Nokia and Siemens. These outsourcing partners manage
the existing network and deploy and operate new base stations in the future. About 800 people
from Bharti were transferred to the outsourcing partners. The value of the 3-year contract was
$725 million. Bharti uses the pay-per-use model (dollar per Erlang; Erlang is a measure of
traffic), and the outsourcing partner gets paid for the capacity used by Bharti and not on the

capacity installed by the outsourcing partner. Bharti has a network management team to
manage the interface with the outsourcing partner.
• IT management to IBM. IBM manages all IT services (billing, customer relations

management), operates data centres, help desk for IT support and application development.
About 200 people from Bharti were transferred to IBM. The $750 million contract was signed
for a 10-year period. Bharti uses a revenue-sharing model with IBM. As revenues grow, Bharti
shares a smaller percentage of revenue with IBM. Bharti has a seven-member architecture
review board, which ensures that IBM decisions are aligned to the long-term goals of Bharti.
• Customer service call centres to Hinduja TMT, Mphasis, IBM Daksh and Teletech India.
These outsourcing partners set up about 6,000 seats and have been managing customer service
call centres for all customers except corporate clients and high-value clients. Bharti has about
1,500 seats in-house to maintain customer service for these high-end customers. This $350
million contract was signed for a 3-year period.
Bharti prepared a very comprehensive set of detailed service-level agreements (SLAs) with
each outsourcing partner. These SLAs take care of almost all contingencies. Bonuses and
penalties for the partners are linked to performance on crucial SLA measures. The partners
committed 99.99 per cent availability of service. Bharti put up extensive mechanisms for
managing its relationship with the outsourcing partners.
TOYOTA: IN-SOURCING OF ELECTRONICS PARTS

Traditionally, Denso was the sole supplier for Toyota for all electrical and electronics parts till
1988. In 1988, Toyota opened its own electronics manufacturing facility, as it had recognized
by the mid-1980s that electronics was going to play an important part in automobile
manufacturing. It is estimated that, today, about 30 per cent of the total vehicle content is
related to electronics. As the share of electronics in cars is increasing and as these technologies
change at a pace faster than those of traditional automobile technologies, Toyota identified
electronics as a core and strategic function and decided to master it so that it can manage its
suppliers effectively. They still depend a lot on Denso for supply, but they have consciously
built design and manufacturing capability within the firm
M I C R O S O F T’ S E N T R Y I N T O V I D E O G A M E BUSINESS
When Microsoft decided to get into the business of video games in the mid-1990s, it decided
that it would not carry out manufacturing and distribution activities in-house. Microsoft wanted
to ensure that the Xbox was on the retailers’ shelves in October 2001 and was sold for $400.
Microsoft was very clear that it would focus only on the software part of the Xbox and leave
the hardware design and manufacturing to Flextronics, a large electronics manufacturing
service provider. While Sony keeps both design and manufacturing functions in-house, because
it has competence in these areas, Microsoft decided to outsource these activities. Michael
Marks, CEO and Chairman, Flextronics, commented: “Without Flextronics, there would be no
Xbox—only the idea of it. Microsoft has a ton of money, but if they had to build factories, they

wouldn’t have done this project. If guys like us didn’t exist, guys like Microsoft wouldn’t do a
hardware product. The risk would be too high.”
E-SOURCING AT MARICO
Marico is a market leader in the hair care business. For its Parachute brand, it procures copra
(raw material) worth Rs 3 billion in money value and equivalent to 600 million coconuts in
quantity terms annually. Copra supply has traditionally been in the unorganized market and
most of the producers are illiterate. Buying copra on this scale required lot of time and effort
on the part of Marico. In 2004, Marico launched an e-sourcing initiative (implemented in
stages), which transformed the buying process gradually from manual to an automated
electronic process. Potential vendors send their quote through SMS and get an electronic
confirmation within half an hour. The payment is also made electronically. Apart from making
the process more efficient, e-sourcing has given Marico much greater control over the buying
process.

SCM Notes 1 and 2 Modules

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

SCM Notes 1 and 2 Modules

Uploaded by

Copyright:

Available Formats

Supply Chain Management Prepared by Sathish S Nadig

Module 1: Introduction to Supply Chain Management,

CANARA ENGINEERING COLLEGE, BANTWAL 1

CANARA ENGINEERING COLLEGE, BANTWAL 2

Evolution of Supply Chain Management

CANARA ENGINEERING COLLEGE, BANTWAL 3

CANARA ENGINEERING COLLEGE, BANTWAL 4

CANARA ENGINEERING COLLEGE, BANTWAL 5

2.Supply Chain Planning

CANARA ENGINEERING COLLEGE, BANTWAL 6

Structure of Supplier Manufacturer Customer Chain.

CANARA ENGINEERING COLLEGE, BANTWAL 7

CANARA ENGINEERING COLLEGE, BANTWAL 8

Simulating these Supply Chain Participants

Enablers/Drivers of Supply Chain

CANARA ENGINEERING COLLEGE, BANTWAL 9

CANARA ENGINEERING COLLEGE, BANTWAL 10

WHEN TO BE EFFICIENT AND WHEN TO BE RESPONSIVE

CANARA ENGINEERING COLLEGE, BANTWAL 11

What is supply chain strategy?

CANARA ENGINEERING COLLEGE, BANTWAL 12

CANARA ENGINEERING COLLEGE, BANTWAL 13

CANARA ENGINEERING COLLEGE, BANTWAL 14

Supply chain Performance Measure

1.Non - Financials Measures

CANARA ENGINEERING COLLEGE, BANTWAL 15

CANARA ENGINEERING COLLEGE, BANTWAL 16

CANARA ENGINEERING COLLEGE, BANTWAL 17

Make Versus Buy: The Strategic Approach

CANARA ENGINEERING COLLEGE, BANTWAL 18

CANARA ENGINEERING COLLEGE, BANTWAL 19

Market Versus Hierarchy

CANARA ENGINEERING COLLEGE, BANTWAL 20

CANARA ENGINEERING COLLEGE, BANTWAL 21

CANARA ENGINEERING COLLEGE, BANTWAL 22

CANARA ENGINEERING COLLEGE, BANTWAL 23

CANARA ENGINEERING COLLEGE, BANTWAL 24

Reconfiguration of the Supply Base

CANARA ENGINEERING COLLEGE, BANTWAL 25

moving to system/module buying, which requires a pyramid-shaped supply structure. Auto

Supplier Selection—Auctions and Negotiations

CANARA ENGINEERING COLLEGE, BANTWAL 26

Creating a World-class Supply Base

CANARA ENGINEERING COLLEGE, BANTWAL 27

The Role of Supplier Development in Supply Chain Success

CANARA ENGINEERING COLLEGE, BANTWAL 28

• IT management to IBM. IBM manages all IT services (billing, customer relations

TOYOTA: IN-SOURCING OF ELECTRONICS PARTS

CANARA ENGINEERING COLLEGE, BANTWAL 29

CANARA ENGINEERING COLLEGE, BANTWAL 30

You might also like